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01/29/2012

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Pradeep Despandee

“…so his after tax profit is $8500(1+x) on an investment of $100,000(1+x).”

The investment is still closer to $100,000 excluding second order effects. There is no 1+x.

The x factor increases not only the value of the stock, but also the rate at which the stock gains value. Stock values would increase much more rapidly for stocks of successful companies since the expectation of success would grow much faster in an environment where companies can keep their earnings and reinvest them in addition to being able to distribute them.


But, ultimately one need not be a mathematical genius and an economist to understand these things, no more than the way in which even a common person can understand the principle of conservation of energy, even though they may not be able to debunk every clever perpetual motion machine presented.

Prosperity equals production, there is no way around it. And people operating under flat-effort reward curves (because they can keep less of the fruits of their labor and because some basic state goods they get unconditionally no matter how much they produce) simply don’t have the incentives to produce as much. And, unfortunately the effects of lower production (low growth rates) relentlessly compound with time.


It is hard to say what x would exactly be but it would most likely be significant. A stock’s share value is essentially the sum of all after tax profits that correspond to that share integrated and time discounted to infinity. Since the time discount goes to 0 at infinity, the infinite integral is still a finite quantity and also includes the risk of the company going south at one point or another, a fate that eventually meets almost all companies as their products and technologies become obsolete and they fail to adapt. So the effect of a lower tax rate means that the company has more money to invest, or turn over to the private sector in the form of dividends to be spent or invested. So the benefit of the lower tax, causes the company to grow faster and that higher growth is compounded into infinity. However, as I said earlier, because the total stock value integral contains the time discount multiplier, and risk, the total integral sum is not infinite. In short, there would be an X1 for a high tax environment and a greater X2 for a low tax environment. A simpler way to see how that works is to examine boundary conditions. Under a 100% corporate tax rate, there is no X (… well X=0).

Pradeep Despandee

“…so his after tax profit is $8500(1+x) on an investment of $100,000(1+x).”

The investment is still closer to $100,000 excluding second order effects. There is no 1+x.

The x factor increases not only the value of the stock, but also the rate at which the stock gains value. Stock values would increase much more rapidly for stocks of successful companies since the expectation of success would grow much faster in an environment where companies can keep their earnings and reinvest them in addition to being able to distribute them.

Pradeep Despandee

Sorry for previous double post.


“At the present time corporations are flush with cash…but won't spend it because demand is weak.”

I think that K. Lima ( 01/31/2012 at 07:25 PM) does a very good job indirectly answering this fallacy, which, while sometimes correct under Keynesian cyclical theory, cannot hold true in perpetuity, and that is why K.Lima very correctly suggests that distributing money to create demand is a rather naïve shortcut to prosperity, akin to having invented some perpetual motion machine.

In a world where an entire four, five billion people have less than the Average Middle Class American, there is no demand for stuff that American companies produce? Most of the world’s citizens only fantasize of having the stuff that American companies produce and only dream of consuming it. Their demand is enormous and almost insatiable… The problem is, of course, that the average world citizen, poor by American standards, i.e. the less productive of this world, have nothing (well… very little) to offer in exchange for the products that Americans produce. So the transaction does not go through as Americans are not willing to exchange the design and production effort that corresponds to something like an iPhone with thirty four potatoes from someone’s field in Indonesia.

And that is ultimately the same root cause of the slower growth for the American middle class standard of living. Their production, while still top notch by worldwide standards (for now) is no longer commensurate to the six times world average standard of living they take for granted and expect as a pre-ordained American middle class privilege. BUT…trying to make up for the deficit between productivity and an expectation to superior standard of living by the redistribution and central planning shortcut to prosperity, i.e. by further flattening the effort-reward curves to European levels is absolutely the wrong and exactly the suicidal thing to do. Many one cultures have suicide this way.

America has already steered towards a lower perpetually compounding growth trendline.

The problem is that by the time the more visible effects of decline start showing up and being rationalized by the electorate: i.e.

(1) American companies equally weighed down by regulation (the world norm) and employees operating under a flatter effort-reward curve (again the world norm) start being outcompeted by foreign companies, with foreign workers, foreign management, created by foreign capital and operating under foreign law
(2) The best and brightest of the world stop coming to America just like they stopped going to Europe and start staffing the emerging overseas competitors,

…yes, by that time…. the pendulum has already started swinging in the opposite direction and it is too late to react.

By that time, it means that you have not only lost all your existing momentum but have actually gained significant momentum in the opposite direction. In these circumstances electorates almost universally respond by hope to survive through as few changes as possible (a compassionate republican in 2016?). it does not work, and decline continues, save the few spasmodic attempts – the death throes of a once prospering empire in decline.

Jack

Stan! Kudos....... precisely the right prescription...... and zooming in a bit more we need to spend on projects of the better returns and get rid of as much wasteful pork as possible.

Jack

Ha! Stan, in your 747 figures, on Tuesday you'd get the "new age" "economists of the right" telling you that having raised taxes on the poor widget maker you'd have ruined their chances of having such a capital increase.

BUT! if you checked back with a slightly different wording on Thursday..... they'd tell you that "the corp simply passes on the additional taxes in the form of higher prices to us"

Jack

Pradeep? "fallacy?" Other than demand..... why would any of these companies "invest?"

Currently it appears we've the same or a bit more GDP as before 7 million folks lost their jobs. And consider, in most mfg how much investment would it take to gin up 20% more units? From GM to Dell computers, the fast selling I-products, I'd bet they can increase production 20% in one year with little to no investment and hiring back only a few employees.

Yes....... "giving" folks money with which to "go shopping" does seem a bit like the tailor trying to cover his feet by cutting a bit off the top of the blanket and sewing it on the bottom.

But! as Stan rightly points out we are not all of the same cloth. Those of the 5% 1% and .1% can not possibly consume even a major fraction of their gleanings...... thus, be it purchasing one more mansion or compound or tucking it away in other investments, they are savers, big savers.

Thus....... if the President had his way and could "pay for" the payroll tax cut that benefits all, but in percentage terms benefits working folk more by rolling back the, unaffordable upon inception Bush tax cuts, we'd likely see less savings at the top, and far more spending by the 95% who for the most part are strapped and unable to spend what they do not have.

There are a number of "strapped" groups and one is that of our increasing numbers of "retirees" ha! often those booted out of the corporate rat race for being "old" or a "health risk" the company does not want..... who then leap to the only lily pad in sight, the drawing of SS at perhaps a younger age than the current 67 of full eligibility.

"Retirees" count on SS for 55% of their income which means they hover around $25,000 of total income. Today a number of things are chipping away at that from increased Medicare payments, oil price gouging etc that go up faster than do fixed incomes and with as pointed out here, interest income becoming zilch.

Thus? few trips to see kids or grandkids, and fewer gifts or even trips to the local franchise cafes. Sooooooooo, in an economy 70% dependent on consumer spending? write off increasing numbers of "retirees?" Or? slip in some subsidies be it H/C or whatever and "pay for it" by canceling the ludicrous F-35 program? or stiffening the progressivity of taxes even a bit more?

NEH

Twice I've written comments, twice I've posted them and twice I find later that they have been taken down. Is this what passes for Intellectual Freedom at the U. of C. these days - the muzzel?

Where would the World be today if the 95 Theses had been taken down prematurely from that Church door back when...

Jack

NEH........ lacking any terms of use..... not sure what the game is here..... but note that my attempts to contribute, for discussion, the wisdom of Krugman have disappeared as well, but then it could be a commercial issue.

NEH

Jack, Yeah... Welcome to the world of "High Tech". At least Luther and Gutenburg didn't have these types of problems. ;) Until that little trial by the Diet at Worms and then the world changed forever... ;)

Alix Hoquet

Envy is not focused on wealth, its focused on access.

But its often confused, because the wealthy, by their very wealth, have greater access to the popularized form wealth creation: financial instruments. Simultaneously, other forms of wealth creation, like human capital and natural resources, have been so operationalized that instrumental values greatly distort the real values. (Corn farmers are familiar with this problem, for example.). Without access to principle, or luck, the average earner is increasingly shut out of the marketplace.

Morgan Price

Most counties already assess the value of homes and other real estate and tx them. A federal wealth tax would be a big change but it seems feasible.

Jack

Stan... that's about right, however, today investment opps even at zero effective interest rate are few.

Any objective observer can see that we're a D E M A N D crippled economy. If any doubt the two graphs below clearly depict the situation:


http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

.......... like how much more can those middle and lower tiers be squeezed to continue the soaring rate of income and wealth inequality?

And Ha! many conveniently forget the tax reforms of JFK were those of lowering the 90% marginal rate meant to finance WWII....... and I assume, discourage the budget busting war profiteering we've been subjected to for the last decade.

Ron Toczek

I stopped reading the post after reading the first paragraph. I do believe that Mr. Pozner should bone up on the history of booms and busts within a capitalistic system. No regulation will prevent them. Yes, mistakes were made, but the looser regulations enacted earlier enabled more to be hidden for a longer period.

John Johnson

I'm a business owner. I made $362,000 a year. I paid appox. 35% federal and 15% to CA. I work
min 60-70 hrs a week (incl weekends). I live in constant paranoia about my company and its success and its employees. I could live on less but why do I have too? I think I pay enough and I deserve nice things because I work hard.

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Jack

Have you considered getting married? Though even as a single your effective rate is more like 30%. In this DEMAND constrained mess, I can understand some paranoia. But then? with a lot of able young folk coming out of college, one suggestion might be that of spending a tax deductible 10% of your income on an energetic assistant. Surely 40 gut grinding hours of his/her time could save you a valuable 10 - 20 or more hours of your time if you're and effective delegater.

http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

As for paying more? Well one reason might be the fine breaks awarded when Bushie got in........ and then ginned up a VERY costly war in the wrong nation for irrational "reasons". Some one has to pay the bills and take a look:

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

The bones of working folk have been pecked pretty well bare.

Ah........ CA? Well, odds favor your being on the receiving side of the Jarvis Prop 13 that Buffet, paying only $2,000 on his Malibu estate denounced as one of CA's worst policies with the benefits awarded long time high dollar estate owners having to be made up by income and sales taxes.

I suppose one would add to the irrationality of Prop 13 so many people remaining in the "wrong house" for tax reasons that you all suffer gridlocked traffic in EACH direction and have to bear some of the costs of continually interweaving more freeways and offramps into the congested mess.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Ron: in the years since we've implemented the Fed Reserve, but for the Depression we have seen gentle, perhaps "corrective" recessions with fairly rapid rebounds.

While you're right that "regulation" is unlikely to give us a smooth ride in the chaotic world of "globalism" and its many surprises, surely you CAN see that regulation of "non-bank-banks" and "insurance companies" under the same unregulated roofs is the ONLY way to prevent the greed ridden foxes of Wall Street again laying waste to our economy, the careers of its working folks and their retirement plans.

BTW........ did you note that in what remains of our demand starved economy only TWO companies were responsible for "growth" last year? One, of course is the much loved Apple....... and the other the much despised AIG. Not too healthy eh?

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bill

A wealth tax would be a tax on property, not income, and as such it would be a direct tax that would have to be apportioned among the states based on population.

Alex

i hop taxation would not be hard, thanks

Paul Smith

Merci beaucoup pour votre article.

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